We have been hearing about a speculative bubble for years because of low interest rates, tax breaks and price drops especially in Sydney but a crash is more complicated than we think.
While the Australian property is expensive relative to income, rents and its long-term trend, it is still dangerous to generalise.
Australian properties have poor affordability and the price surge has seen a debt surge, which has taken our household debt to income ratio to the high end.
This exposes us to financial instability in case households cut their debt but don’t worry. Remember that supply still has not kept up with the demand.
Only Sydney and Melbourne have sustained rapid price gains in the last few years.
Most Australian cities swing around the national average with prices in about two cities surging for several years and underperforming the next as poor affordability forces demand in other cities.
There is an increase in immigration and population growth, requiring around 55,000 more homes every year.
The supply has not kept pace so a shortfall drives high home prices. However, there is now a recent surge in unit supply but still no basis for an oversupply problem.
Lending standards have also been improving. Interest-only and high loan to valuation loans have been dropping recently and the increase in debt has gone to wealthier
Australians who can better service their loans. The Fujitsu Mortgage Stress Survey has talked about high levels of mortgage stress for years but still, there was no crash.
Meanwhile, tax breaks and foreign buyers may have played a role in the supply shortfall but they may not be that important. CGT discounts and negative gearing have long been in our tax system but they don’t really drive home price increases as we can see in Perth and Darwin.
So far, there is no sign of recession as jobs data remains strong, the RBA may only gradually increase interest rates and approvals to build new homes are still slow.
Excessive home prices and debt levels are real risks but a crash is more complicated than that. Nevertheless, investors still have to be careful and are better off focusing on cities and regional areas that have been left behind and where rental yields are higher.
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